Commentary: Infrastructure put to the ultimate test by crisis

After more than a year from the beginning of a period of sustained lockdowns around the world, and despite a vaccination program that is providing hope of an exit, we already know that the economy and society as a whole have been severely affected and the repercussions of COVID-19 will last for years to come.

Institutional clients are asking about the impact of COVID-19 on the infrastructure asset class. Did infrastructure prove to be resilient? Which companies managed the situation best? To answer these questions properly, we need to recognize that there are different types of infrastructure assets and that they have all had different experiences and performances through the crisis.

The pandemic has revealed stark differences in the sustainability and resilience of different infrastructure assets. Whereas the demand for infrastructure assets such as airports, highways and public transport has seen a sharp drop in traffic due to restricted discretionary travel, utility networks that provide a critical customer service have proven to be very resilient. Passenger numbers in most transport assets have correlated directly with the various lockdowns over the last year and that has put significant pressure on debt covenants and equity valuations and exposed again the fragility of combining highly geared capital structures with volatile business risk profiles.

On the other hand, core assets, such as regulated energy and telecommunications networks need to operate efficiently and deliver their critical services in both good and bad times. Indeed, with working from home having become widely accepted, everyone has appreciated even more the need for a strong and reliable digital connection. COVID-19 has been the ultimate stress test for many companies and their business continuity management processes and safety protocols. These have on the whole been sufficient, but the pandemic has also given pause for thought about how to structure and improve such processes in future. Moreover, active asset management has come to the fore as investors have had to work closely with their management teams to ensure a continuity of critical services and adaptation to working from home practices.

The difficult time we are going through due to the pandemic does not automatically mean that ESG aspects are not relevant anymore. The current challenge has actually emphasized the important of the "S" for society and the "G" for governance as companies try to keep their customers and stakeholders strong and supported.

Many companies and their employees have been helping their communities during the lockdown. Be it the engineer from a gas network who used his customer visits to do the grocery shopping for elderly people in the area or the water company that offered their workers at home mental health guidance — COVID-19 has been the pivotal moment for all companies to prove that they do not just talk, but also act.

The pandemic has tested the governance model, the business continuity management, the robustness of contracted and regulatory frameworks, and focused attention on a company´s reputation with its key stakeholders. Speed and flexibility were critical at the beginning of the pandemic. New processes had to be established to meet new regulations (e.g., social distancing). Measures that seemed impossible were suddenly realized at record speed.

Crises make one learn for the future. Despite the declining infection rates in many countries and progresses on the vaccination program, the effects cannot be quantified yet, but every asset owner has learned important lessons that will help to ensure they are even better prepared for the next crisis. The pandemic has underscored the importance of a forward-looking approach and more than ever we believe that investors will focus on ESG aspects to weather future challenges.

Most companies were able to adjust rapidly to the new situation. The prerequisite to allow people to work remotely is high-speed connectivity, also in rural areas, which is very often not the case yet. If there was any doubt before the lockdown as to whether digital infrastructure provided essential services in the same way as more traditional gas, water or electric utilities, there is no more. Even if most European countries have made remarkable progress in rolling out fiber, the pandemic has shown that it is not sufficient. There is still a huge gap in the digital divide and private investors can help to bridge this gap. In recent years, we have seen an increasing appetite from investors for digital assets such as cell towers, data centers and broadband projects. Allianz, for instance, has been investing for some years in the expansion of digital infrastructure and recently announced a joint venture with Telefonica to further accelerate the fiber roll out in rural and semi-rural regions of Germany.

We will continue to see people working remotely in the future as the pandemic has proven that it is not just possible, but effective. Local and digital supply chains have gained importance during the lockdown and companies need to be able to rely on digital solutions to sell their products and services. Digital infrastructure will become a critical competitive advantage.

The pandemic is not over yet. There will be no complete "back to normal" and investors need to look at what is essential for our future. Governments will launch new stimulus packages to support the economic recovery and will foster new investment structures. Infrastructure can play a vital role in the post-pandemic recovery as a driver toward a sustainable future. Projects will pay even more attention to the principles of sustainability as both governments and investors will increase their commitment toward decarbonization, digital connectivity and the safety of energy supply. Responsible investors, representing the population through long-term insurance and pension money, can make the difference here, for the benefit of a changing society and their customers.

Andrew Cox is co-head of infrastructure at Allianz Capital Partners. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.